I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

The Question Investors Must Ask Before Crowdfunding

Equity crowdfunding has experienced dramatic growth in the past year, with platforms giving accredited investors the ability to explore potential investments online more quickly and easily than ever before. But all equity crowdfunding platforms aren’t built the same, and it’s important to assess a few factors before determining which platform you wish to use.

The number one question to ask is this: How are companies performing since they raised money on equity platform that you are considering using?

I would love to be able to present this data from every platform- and I welcome others to present theirs. For now, I can only present ours- and hopefully that comes across as informative as opposed to promotional. We launched in April 2012, so it’s still a bit early for exits. However, the initial results are encouraging. Although past performance is not an indication of future results, for the companies that have raised funds on our site, the average revenue growth has been 80 percent year over year, and the average gross margin expansion has increased from 34 to 39 percent.

The numbers above look even stronger when one compares the average growth of CircleUp companies to overall growth in consumer package growth. According to AC Nielsen data, big CPG grew 1 percent per year between 2008 and 2012. Medium-sized companies grew 4 percent a year, and small companies grew around 5 percent per year.

In addition, multiple companies have raised follow-on rounds. One such company is Little Duck Organics, a Brooklyn, NY-based startup selling healthy kid snacks in innovative packaging. After initially receiving seed money through angel investors and CircleUp, the company raised $4 million in Series A funding.

This isn’t to say that all companies will thrive after raising money on equity crowdfunding platforms, including CircleUp. Some of these companies will inevitably fail. Private investing is high risk and illiquid. However, investors still have the possibility of outsized rewards. “Even in consumer products, though the N is small (just 29 companies) investors experienced 3.6x their investment in an average of 4.4 years,” points out Rob Wiltbank, Associate Professor of Strategy and Entrepreneurship at Willamette University. Wiltbank was the lead researcher of the Angel Investment Performance Project (AIPP), the largest study on financial returns of angel investors in North America, released by the Kauffman Foundation.

As an investor, you should be looking for similar data on any platform that you may want to use, especially if it’s been around for over a year. Unfortunately, it’s not always easy to determine how companies that have raised money on equity platforms are doing. On many sites, you can’t find any performance numbers of how much companies have grown at all. With a little bit of online research, however, you can check to see which companies are still in existence and whether they’ve raised follow-on funding.

Additional factors

In addition to how companies have been performing since they raised money on an equity crowdfunding platform, there are a few other factors to pay attention to:

Make sure to work only with broker-dealer platforms.

According to Section 15 of the Securities Exchange Act of 1934, a firm that buys or sells securities for itself or others must register with the SEC and join a self-regulatory organization, or SRO. While some platforms have developed models outside of this framework, working with a broker-dealer is important. The industry has rules and standards to help protect both the entrepreneurs and the investors. Not abiding by these regulations can result in serious consequences for member firms, so these firms have a much larger incentive to ensure the offerings are conducted in a fully compliant way.

Look for a team with investing or finance experience.

Vertically-focused platforms are particularly helpful to companies because of their specialization, so it should go without saying that they should be run by a team very experienced in that space. Not only should they have experience as private investors, they should have experience as private investors focused on the very category they’re evaluating. For example, the people building a biotech marketplace should have worked in biotech and have experience as investors in biotech companies.

Look for a platform that adds value to the companies they invest in.

One of the ways we add value to the companies on our site is through education and through partnership. We host webinars to help educate our companies on a variety of topics, including marketing, evaluating distribution channels, and so forth. We also have strategic partnerships with Procter and Gamble and General Mills. These partnerships benefit our companies in a variety of ways, by helping them get distribution, acquire third party data or make connections with people in the industry. There are a lot of other creative ways to help these businesses be successful- many of which we wish we had thought of first. The point is to make sure you’re at least asking the right questions.

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